Protect Your Bitcoin Wallet After You Die

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Posted onMay 13, 2013

Estate planning is an essential consideration for everyone that has assets to pass onto their beneficiaries. Since bitcoin functions as a store of value, it is important to treat bitcoin similar to any other asset.

One of the goals of a bitcoin wallet owner is to secure his/her wallet so others cannot gain unwanted access to it. This security also prevents your loved ones and beneficiaries to gain access to your bitcoins in the event of your death unless you have planned for it. For this reason, it is very important to consider the options you have to plan for this situation. In this article, we’ll show you five different ways to solve this problem.

Create a copy of your bitcoin wallet file

Creating copies of a wallet file can allow for multiple people to have access to the same funds. This is the quickest and easiest method to pass your bitcoins on; however, it is also the least secure.

It is as easy as copy and paste

Advantages:

The entirety of your wallet is inherited by your beneficiary; not just specific addresses.

It is easy and quick to do.

Risks:

Whoever has a copy of your wallet file needs to be just as vigilant maintaining security of the file as the original owner. If access to your wallet file is gained by an untrusted 3rd party, all of the wallet’s funds can be stolen.

The beneficiary has access to your wallet at all times, so a great level of trust is needed between the original owner and the beneficiary.

Depending on the bitcoin client being used, the beneficiary will only have access to the addresses that were available when the wallet was copied.

M-of-N Transactions

Within the bitcoin protocol, there is the ability to send transactions where multiple signatures are required. M-of-N transactions are transactions where N parties are eligible to sign the transaction, but only M signatures are required to validate a transaction. One specific application of this is used in dispute mediation, where 3 parties are involved: the sender, the receiver, and the mediator. If the sender and the receiver agree to the transaction, the funds are sent to the receiver. If the sender or the receiver are not satisfied, they can see the dispute mediator and the mediator can sign off with whichever party it chooses based off the circumstances.

For estate planning purposes, you can send a transaction to your beneficiary that requires 2 of 3 parties to sign. The parties involved can be you, your beneficiary, and a 3rd party (e.g. a company that specializes in wills). If you pass away, your beneficiary and the 3rd party can sign and the bitcoins will transfer to your beneficiary. If you are still alive, your beneficiary signing it without the 3rd party will leave the transaction in an invalid state.

Advantages:

After your death, a will service company and your will executor make the decision to execute this order only after you die. (proof via death certificate, etc.)

The transaction type already exists in the bitcoin protocol, so it is easy to implement immediately. There is nothing stopping you from creating this transaction yourself.

M-of-N allows for more than just 3 parties. You can have as many parties’ signatures as you want.

Wallet security – The receiver of this transaction does not have access to the bitcoin wallet; only this transaction.

Risks:

The bitcoins would need to be “frozen” in this address.This method requires a sending address and receiving address to be written into the transaction. In order for this bitcoin transaction to be able to be validated in the future, the sending address can’t be used.

The parties involved need to secure their keys. If these keys are lost or compromised, the transaction may not be able to be validated in the future

Dead Man’s Switch

Expanding on the M-of-N solution, one of the parties in this type of transaction could be a computer server that verifies if a user-provided expression is true. This type of computer server is known as an oracle. The oracle has its own unique key and has the ability to sign a bitcoin transaction. The oracle can evaluate whether a person is dead or alive by checking death certificate databases. If it finds a death certificate for the person it is looking for, it will sign a transaction transferring the bitcoins to the beneficiary.

Not these oracles.

A very simplistic oracle example is a dead man’s switch. This program will email you at a specific interval asking if you are alive. If you are, you respond by clicking a link in the email. If not, the program will wait and email you again. If you don’t respond after a number of tries, the oracle will activate the switch and sign the transaction to transfer the bitcoins.

Advantages:

Wallet security – The receiver of this transaction does not have access to the bitcoin wallet; only this transaction.

The beneficiary simply has to broadcast the transaction. You don’t need any other parties to sign the transaction since it already has been signed when you created it.

The transaction type already exist in the bitcoin protocol, so it is easy to implement immediately. there is nothing stopping you from creating this transaction yourself.

Risk:

This method requires a sending address and receiving address to be written into the transaction. In order for this bitcoin transaction to be able to be validated in the future, the sending address can’t be used. This effectively means that these bitcoins would need to be “frozen” in this address.

If the granddaughter loses the transaction and cannot broadcast it, the bitcoins will never be transferred. The security of the transaction is of utmost importance.

Lock time transactions

A lock time transaction can be submitted to the network but won’t be accepted until the time specified on the transaction is valid. Think of this as post-dating your checks with a future date.

If a grandmother wants to leave an inheritance to her granddaughter, she can create a lock time transaction with a lock time of 1 year from the current date. The grandmother could broadcast the transaction right away but the nodes of the bitcoin system may decide to drop transactions that are locked to a date so far in the future. For this reason, the grandmother should sign the lock time transaction with her private key and provide the transaction to her granddaughter to broadcast to the bitcoin network when it is valid. If the grandmother is still alive when the transaction lock time is valid, the grandmother can cancel the validity of the transaction by transferring the bitcoins from one bitcoin address to another. Since the original lock time transaction is defined by specific input address/es and output addresses/es and a specific amount of bitcoins, changing the status of the input addresses/es will invalidate the transaction. At this point, the grandmother can create a new lock time transaction for 1 year from today. This cycle can be repeated until the grandmother passes away and the granddaughter broadcasts the valid lock time transaction to the bitcoin network and the bitcoins are transferred.

Advantages:

Bitcoin wallet security – The receiver of this transaction does not have access to the bitcoin wallet; only this transaction.

The beneficiary simply has to broadcast the transaction. You don’t need any other parties to sign the transaction since it already has been signed when you created it.

The transaction type already exist in the bitcoin protocol, so it is easy to implement immediately. there is nothing stopping you from creating this transaction yourself.

Risk:

This method requires a sending address and receiving address to be written into the transaction. In order for this bitcoin transaction to be able to be validated in the future, the sending address can’t be used. This effectively means that these bitcoins would need to be “frozen” in this address.

If the granddaughter loses the transaction and cannot broadcast it, the bitcoins will never be transferred. The security of the transaction is of utmost importance.

Shamir’s Secret Sharing

This is a form of secret sharing popular in the cryptography community. For the technical details, please see a white paper on it.

Divide your wallet into many pieces and then create a series of books and movies about it

It is possible to divide a wallet file into N pieces so that to obtain the keys, all N pieces must be brought together. The individual can give out these pieces to people they trust (spouse, children, grandchildren, etc.) and upon the individual’s death, the pieces can be brought together to form the wallet. Once fully constructed, the wallet file can be used to transfer the bitcoins from the original owner to the beneficiary.

Needing all N pieces to form the wallet creates risk that one person could lose his/her piece, which means the wallet could never be rebuilt. Shamir’s Secret Sharing solves this all-or-nothing risk. Using Shamir’s Secret Secret, you can identify a certain threshold M that, if reached, will allow the wallet to be rebuilt. As an example, let’s say a wallet is broken into 11 pieces; the threshold may be set at 6, so that any 6 pieces brought together can build the wallet.

Advantages:

The beneficiaries will have access to the entire wallet; not just specific addresses.

By itself, each piece does not have the ability to gain access to the bitcoin wallet.

These secret pieces could be hidden and provide a fun adventure for your beneficiaries when you die.

Let’s search for bitcoin treasure!

Risk:

Depending on the bitcoin client being used, the beneficiary will only have access to the addresses that were available when the wallet was copied.

If enough of the parties provided secret pieces wish to access the funds prematurely, they can collude together and create the wallet and disburse the funds.

As of today, there are no companies that specialize in estate planning, so it is up to the individual. These options are not mutually exclusive; you can use one of them or multiple options at once. With 1 BTC valued at $100-150, you may wish to start thinking about this topic.